18 April 2019
Bond and equity markets are sending out conflicting signals in 2019. Global equities have had the best start to a year in two decades but government bonds are indicating risk aversion, with the 10-year US Treasury yield down to 2.5% (it peaked at 3.2% last November), whilst in Germany the 10-year yield has gone negative again. More significantly, in late March the US yield curve inverted, which happens when long-term rates drop below shorter-dated bonds. This has historically been an indicator of an economic downturn. Adding to concern is the behaviour of central banks – in the US, the Fed has abandoned projections for further rate rises this year, and the ECB has revived stimulus through a bank lending programme
Meanwhile, bodies such as the World Trade Organisation and the IMF have cut global growth forecasts. Factors contributing to this include a slowdown in China, tariff disputes involving Washington, Brussels and Beijing, Brexit uncertainties and the fading of Trump’s tax cut stimulus. The behaviour of bond yields has probably been muddied by quantitative easing, and the strength in equities may be a knee-jerk reaction to central banks stepping back from policy tightening. Nevertheless, the contradiction between these two markets ought to be unwound. If bonds are correct with their concerns, then equities should lose some of their recent gains; however if equities are correct, and global growth recovers as some commentators are now forecasting, then it is bonds which will have to give way.
The fund recovered relative performance during the month, gaining 3.3% against a benchmark rise of 0.4%. Major contributions came from Manolete, the insolvency litigation finance provider, which continued its strong run since IPO; Diversified Gas & Oil, the US onshore energy producer, which announced a placing to acquire further Appalachian assets; and Gamma Communications, the fast growing VOIP and Cloud telecoms services provider, which continues to be re-rated. The largest detractor from performance was Just Group, the equity release mortgage provider, which announced a fund raising to strengthen its balance sheet following capital adequacy changes by the Prudential Regulation Authority.
During the month, new positions were taken in RWS, the global leader in intellectual property services specialising in international patent translations, filings and searches; Randall & Quilter, a non-life insurance specialist, involved in acquiring and liquidating legacy books and writing new books for re-insurers in an arrangement known as Programme Management; and Bonhill, a business media company already held in our AIM VCT, where the fund participated in a placing for a significant acquisition. Holdings in Accesso, Burford Capital and IG Group were sold.
Against a benchmark gain of 1.2%, the VCT returned -0.1%. Whilst there was evidence of recovery at the upper end of AIM, with the index of the largest 100 stocks gaining 2.1% in the month, wider investor appetite remained fragile. Any trading disappointments reported by companies can generate significant share price weakness. Some of this volatility may reflect the ongoing impact of recent EU capital market regulations (MiFID II) introduced at the start of 2018. There are thoughts this may have affected liquidity in some smaller stocks, principally through reduced analyst coverage, with low trading volumes having a disproportionate impact on share prices. After its sharp sell-off in the last quarter of 2018, AIM has joined in the general UK stock market rebound this year. Over six months, however, it has lagged materially, offering some prospect of further momentum. The biggest positive contributions during the month came from risk & compliance software provider, Ideagen; computer games publisher, Frontier Developments; the VCT’s largest holding, the TB Amati UK Smaller Companies Fund; and multicurrency payments platform, FairFX.
The biggest negative contribution came from gas, electrical and building services provider, Bilby, which announced two problem contracts where it is involved in negotiations to recover the costs of work done, but which will result in trading losses in one of its divisions. Subsequent to this the company has announced the appointment of both a new Chief Operating Officer and a new CEO. The shares fell 57%. Healthcare software provider, Craneware, softened despite positive results, but the shares have since rebounded. Other weakness involved infection and contamination control product manufacturer, Tristel, and biopharmaceutical specialist, Amryt, in both cases despite no news. A new qualifying investment was made in Diaceutics, which provides specialist data services and consultancy in the rapidly growing area of precision medicines. These medicines are targeted at patients with specific biomarkers that require diagnostic testing. The company collects test data from laboratories on an anonymised basis, and then analyses it for drug company clients. Turnover has more than doubled in the last three years to over £10 million.